Iranian Oil Sanctions More Bark Than Bite

The Latest: As of November 5, the US has reimposed secondary sanctions on Iranian oil. However, the US government has also indicated that it will award waivers to eight buyers of Iranian crudes. Waivers will be granted for a period of six months, at which point buyers will have to apply for an extension.

Implications: The impact of sanctions on oil prices has been neutral to bearish, with global benchmark Brent falling to USD72.6/bbl at the time of writing - more than 15.0% down off its year-to-date high in October. The market appears to have been pricing in more aggressive action by the US, consistent with the hardline rhetoric of US President Trump and his key advisers, who have repeatedly stated their intent to drive Iranian exports down to zero. Nevertheless, significant further volumes are likely yet to leave the market. As such, bearish price sentiment may be off-kilter with the fundamentals, which are neutral-bullish, in our view.

The concessional approach ultimately adopted by the Trump administration likely reflects a number of realities on the ground. Attempts to push exports to zero would have met with strong opposition - and likely non-compliance - by key buyers of Iranian oil, including China. It would also have delivered a sharp supply-side shock to prices, risking damage to the global and US economies and hurting the US consumer. Finally, it could have threatened to undermine relations between the US and some its key allies, on whose support it may rely to achieve other trade and foreign policy objectives, such as those relating to North Korea, Russia and China.

The eight jurisdictions that have been in negotiations for waivers include India, Turkey, China, South Korea and Japan and do not include any markets in the EU. As of Friday, negotiations for only two of the eight waivers had been finalised. The US indicated that those two buyers would be reducing their exports to zero within the coming weeks and so this most likely refers to South Korea and Japan. The only further information we have available at this stage are unconfirmed reports that India will be extended a waiver to import 305,000b/d up to March. This falls broadly in line with our base-case scenario (see below) which puts India's exports at 300,000b/d.

The big questions are what volumes other markets will be allowed to import and what will happen when the current set of waivers expire at the end of the six months. Given the US' focus on restraining oil prices, it is likely that their position on waivers will hinge on the broader market balance: the looser the market, the more aggressive the US is likely to be in its demands. The waivers granted to China will be most significant, given that under all our scenarios China remains the dominant buyer of Iranian crude. We do not expect China will substantially cut its imports, in response to US pressure. That said, the issue of Iranian imports has become increasingly entangled in the broader US-China trade dispute, which is clouding the outlook. On the US side, the decision to extend and renew waivers ultimately rests with the president himself and Trump, as ever, remains a wild card.

What's Next?: The US government has indicated that it will release details of the waivers today (November 5), which will allow us a better handle on the implications for market fundamentals, sentiment and prices. We will look to release a more in-depth analysis at this point.